Tuesday, April 14, 2009

The Dow Jones US Precious Metals Index

The Dow Jones US Precious Metals Index
The Dow Jones Precious Metals Index is a composite index that reflects the performance of the stocks of companies involved exploration and mining of precious metals. The designation of "precious metals" refers to gold, silver, and the platinum group metals (which include platinum, palladium, rhodium, osmium, iridium, and ruthenium). The index does not track the physical metals themselves, only company stocks.

The companies in the index are required to be US-listed stocks or ADRs (American Depository Receipts). The companies also face scrutiny to decide if they are too small or too illiquid. The companies must also be listed in the Gold Mining Subsector
or the Platinum & Precious Metals Subsector of the ICB (Industry Classification Benchmark).

You can't invest directly in the index unless you have a lot of money and time to invest in all the stocks that comprise it. But you can invest in a index mutual fund or ETF/ETN that mirrors the performance of the index itself. One fund that tracks the Dow Jones Precious Metals Index but is leveraged at 150%, is the ProFunds Precious Metals UltraSector ProFund (PMPIX).

If any of you readers are familiar with other funds that track the Dow Jones US Precious Metals Index, please post the name of the fund in a comment and I will add them to the body of this entry. Thanks!

Monday, April 13, 2009

How Is Gold Mined?

The definition of gold mining is the removal of gold from the Earth, done through various techniques. There are three main types of gold extraction: placer mining/sediment mining, hard rock mining, and byproduct gold mining.

Placer mining/sediment mining is the extraction of gold from the ground with little or no excavation. Most other metals are not mined using placer mining techniques, but since gold is so valuable even in small quantities, placer mining has been used to obtain it, particularly during the California gold rush. It is still used to a limited extent today.

How is gold mined? One way is through gold panning.The main technique of placer mining is gold panning. A pan is filled with sand and pebbles that may include small pieces of gold. You add some water to the pan and shake it, and since gold is a very dense mineral it quickly settles at the bottom of the pan. This is done at placer deposits, stream beds where gold settles. Gold panning might have been viable for the independent miner during the gold rush, but is not viable for large gold deposits unless done in a place where labor costs are extremely low.

An aid to gold panning is the use of a metal detector, which the miner can use to locate gold below the surface.

Another placer mining technique is sluicing. A sluice box is a box placed in the water stream that collects gold particles as water washes through it.Gold prospecting with a sluice box

Hard rock gold mining in a pit.The next major type of gold mining is hard rock mining. This is what we most typically think of as "mining", with pits or tunnels dug into the earth to extract gold ore from the hard rock. The largest amount of new gold supplies come from hard rock mining.

Then there is byproduct gold mining. This means that the main metal being mined is not gold, but that some gold is extracted along with the main metal. For example, copper mining often results in the extraction of some gold. (It should be noted that silver is largely a byproduct of copper mining as well).

Once the miners have extracted the gold ore, how do they extract the gold from the ore? The most common method is gold cyanidation. The gold-bearing ore is finely ground, and then sodium cyanide solution is added to it. The gold and cyanide form a solution that can be separated from the rock. Then zinc is added to that extracted solution, which separates the gold from the cyanide. The zinc is then removed from the gold using sulfuric acid, leaving a gold sludge that is then ready to be smelted and refined.

That's quite a long process just to obtain gold. It is precisely because of gold's undying prestige and status as true money and preserver of wealth that we go to such lengths to obtain the precious yellow metal.

How much gold is in Fort Knox?

How much gold is stored in Fort Knox?
The Fort Knox Bullion Depository is in Kentucky, and was opened in 1937. In 1933 the US government expropriated privately held gold, and the increased gold reserves were stored in Fort Knox.

What is kept in Fort Knox?

The U.S. Department of Treasury claims that the Fort Knox gold vault contains 147.3 million troy ounces of gold.

It is also holds some important US historical treasures such as the Declaration of Independence and Abraham Lincoln's Gettysburg Address.

In the 1970s, because of conspiracy rumors that Fot Knox actually contained no gold reserves, an official of the US Mint led reporters and congressmen through part of the facility, showing the 8 foot tall stacks of gold, 36,236 bars in all. One Fort Knox bar of gold weighs 400 troy ounces. The problem is that this was not a real inspection, just a "glimpse" at the gold, and participants claim that they were only allowed to view one storage room, and that they viewed it only through small peepholes. This Fort Knox visit is largely thought to have been little more than a photo op.

Fort Knox Gold Missing?
Suspicion over the amount of gold kept at the facility persists. The last full audit of Fort Knox's gold took place in the 1950s during President Eisenhower's administration. Since then, partial visual inspections have been done, such as the above mentioned walk-through with journalists.

During the 1970s a wealthy businessman named Edward Durell alleged that most of the gold in Fort Knox had been secretly moved out of Fort Knox by President Johnson in the late 1960s in an attempt to keep the gold price suppressed at $35 per troy ounce (the price at which it was fixed under the gold standard). His evidence was mostly circumstantial and anecdotal, so it's far from definite, but it goes without saying that his claims were suppressed and that reporters covering his allegations were soon out of a job.

In 1982 President Reagan set up a gold commission to investigate the possibility of returning to a gold-backed currency. His commission's investigation concluded that the US Treasury now owns no gold, that it is now owned by the Federal Reserve - a private bank and non-government entity.

Theories similar to Durell's have been held by many, that the Federal Reserve has leased out its physical holdings of gold to suppress the gold price and keep the US dollar high. Chris Powell, chairman of GATA, the Gold Antitrust Action Committee points out that since 1995 the US Federal Reserve has been swapping gold with other countries' central banks to rig currency markets and keep the gold price low. The Federal Reserve is a private bank and not controlled by the US government, but as we mentioned before, the Fort Knox gold is now owned by the Federal Reserve. Perhaps this is because of the US's massive amount of debt to the Federal Reserve.

How could the Fed's gold swapping be affecting the gold market today? Chris Powell claims that in a free market environment for gold, prices per ounces would be thousands of dollars higher than they are now. The good news for precious metals investors is that price fixing and market manipulation never works in the longterm, and natural market forces always force a correction to the true level of value.

How Much Gold is in Fort Knox?

Wednesday, April 8, 2009

Gold vs Commodities Index

If you've been reading my blog regularly you have probably figured out that I like not only gold, but also silver. I call this blog the gold market because I see gold as something of a symbol of preserving your wealth against fiat currencies that are being devalued. But gold is not the only precious metal I invest in, and not the only commodity I invest in.

Right now we are in a commodities bull market that began in 1998 or 1999. The average length of a commodities bull market is 18 years, giving us plenty of more time to position ourselves to profit from it. Many think that the commodities bull market has ended, but what we are seeing is a mid-bull market correction. The current prices of commodities in general are extremely low, so now is an opportunity to buy.

I continue to buy gold, but during the current slump in commodities prices I am buying a lot more of other commodities than of gold. The main reason is simple: they have dropped in price while gold hasn't (speaking in general times). At the time of writing, gold is trading at $887.48 per troy oz. That is about the same as June of last year. Compare that to the Reuters-CRB Index (CRB stands for Commodities Research Bureau) that tracks the price of commodities in general, is way down, around 40% down. This is because of reduced economic activity as a result of the global economic recession. Gold has held relatively steady during this time as it is seen as a safe haven during economic crisis. So even though gold has dropped down from its highs, it is not as good of a buying opportunity as other commodities right now. In fact, when economic activity starts picking up again I think that gold will initially drop because it will lose some of its safe haven image, and we'll have a better buying opportunity at that time. Gold will continue to go up much higher when people realize how much the government has debased the currency, but this will be later on. Right now other commodities are cheaper and offer better opportunities for gains.

Gold vs other commodities
So what am I buying? Well, of course I love silver, because it has many of the benefits of gold as "real money" that can not be debased, but it is also much more of an industrial metal than gold. That's why the current industrial slowdown offers a great buying opportunity for silver. There is also a lot of data to show that silver supplies are much more limited than most people are aware of, and when shortages become apparent, the prices will skyrocket like crazy in the coming years. I am snatching up as much physical silver as I can afford to buy.

But I am also putting money into a diversified commodities futures fund, so that I can invest in commodities in general. This fund allows the managers to both short and long different commodities, so it normally goes up even when commodities have dropped, because the managers are shorting commodities. But due to the extra risk in that (they could make a bad trade) I chose a fund that deals only in cash and does not use leverage. Some funds that use leverage get hit very hard when they make some bad trades.

You can also invest in a simple commodities index tracker fund that involves no shorting. I would probably invest in one of these, but I don't have access to a good one where I currently live.

I am also putting money into an energy fund that invests mainly in oil companies. This one is a bit of a wildcard and I expect to sit on this for a while until oil reaches over $100 a barrel again, and then I'll sell it. I'm doing this as an opportunity to learn more about energy, so I can't really put my full weight behind this yet.

I also have a significant chunk of my savings in Australian dollars and Canadian dollars, since those are resource rich nations whose economies in general and currencies will benefit from the rise in commodities prices. I like investing in commodities currencies because I can buy and sell them very easily through online banking. I can sell them at a moment's notice. And the only fees are the buy/sell spread in the exchange rate. Easy. The only problem with currencies is that they can and will fluctuate like crazy in the short term, so I only put in money that I won't need until I'm ready to cash out further along in the bull market.

Those are my current interests, based on the low price of commodities. Commodities provide opportunities for exponential growth from their current levels. I expect that gold will initially drop as they rise. When that happens I will buy more gold, which I think will explode when the degree of currency inflation becomes apparent. Gold is the ultimate safe haven and preserver of your wealth, but commodities in general offer amazing opportunities at the moment.

For historical commodity price data, try here.

Tuesday, April 7, 2009

Mexican Fifty Pesos Gold

Mexican fifty pesos gold coin
The most popular gold bullion investment coins continue to be US American Eagles, Canadian Maples Leaves, and other widely available and very liquid coins. But another coin that continues to be a strong gold investment is the Mexican 50 peso gold coin. It has a number of features that are different from the most popular bullion coins. First off, rathern than containing exactly 1 troy oz of gold, Mexican 50 peso gold pieces contain 1.2057 troy ounces of fine gold (37.5 grams). It is also struck in 20 karat gold, in other words 90% pure gold with the remainding 10% being copper. This gives them an orangey color similar to a South African Krugerrand.

Because of their high gold content and additional copper, they are quite large coins, with a diameter of 36 mm and a total weight of 41.67 grams. Compare that to a Canadian Maple Leaf which has a diameter of 36.07 mm and a total weight of 31.65 grams, and to an American Eagle that has a diameter of 32.7 mm and a total weight of 33.39 grams.

The 50 peso coin was minted in two runs, from 1921 to 1931, and again from 1944 to 1947. The earlier series sells for a somewhat higher premium, but the later restrikes sell at a low premium above spot, similar to the low premium of South African Krugerrands. They therefore make a good bullion investment. I was surprised when I first learned about their low premium, assuming that their age would give them more numismatic value.

50 Mexican gold pesos coinMexico gained independence from Spain in 1821, and the 50 peso coin was produced for the centennial celebrations of Mexico's independence. The obverse of the coin features "El Angel de la Indepencia" (which you can probably guess means "The Angel of Independence"), an image of the statue erected in Mexico City for centennial commemoration. On the reverse of the coin is the Mexican coat of arms.

Because of their relatively large size and captivating imagery, Mexican gold peso coins are striking and enjoyable coins to have as part of your physical gold stack. But they are also solid bullion investments. Just don't let their beauty prevent you from selling them when the price is high! Don't fall in love with your investments or you'll make unwise decisions. But with some self discipline you can enjoy both the coins and the money they will eventualy yield for you.

Friday, April 3, 2009

IMF Plans To Sell Off Gold

This week gold prices have been dropping, hitting a low of $893.24 per ounce on Thursday, April 3rd. This is partly due to the rally in equities, with the Dow rising back up above 8000 points, with investors hopeful that the G20 meeting will help implement solutions to the global economic recession. The second reason is that on Thursday the G20 summit participant countries endorsed a plan by the international Monetary Fund to sell over 400 tons of gold. With this gold being seen as additional supply entering the market place, demand naturally dropped. The IMF's selling of gold, however, has been planned for some time now and Thursday's affirmation by the G20 didn't indicate any new plans to sell off gold.

G20 supports IMF plan to sell gold

What does this mean for gold prices? Well, the price of gold will likely remain down in the short term, as stocks rally. Also, I imagine the prices will fall somewhat when the IMF sells off 400 tons of its reserves, simply because the selloff conjures up images of excess supply flooding the market and will scare some investors into selling. However, the gold market will most likely bounce bank when it becomes clear that the buyers are mostly the central banks of countries who want to increase their own gold reserves. Particularly in emerging economies like China, Russia, and India, there is a desire to acquire more gold for their reserves and reduce US dollar reserves. So even though this selloff may cause a shockwave, I think it will actually improve the fundamentals of gold, because the dollar's value will fall as it is sold off by these countries' central banks. There won't be an immediate rush out of the dollar, but they will gradually reduce the amount they hold.

As for the equities rally, I think this is another short term rally, and I don't think we've seen the market's bottom yet. This recession (I'm being nice and avoiding the "D" word, even I think that's what we're entering) is far from over. And even when the stimulus finally kicks in, we may see stocks rally again, but with inflated currency - making it an artifical rally, essentially. I have little doubt that gold will outperform stocks over the next couple of years. We are, after all, in the middle of a precious metals bull market that is far from over. Equities are in a bear market. I wonder if people have forgotten that markets are cyclical. They seem to think that equities can be in a bull market forever with only minor short term interruptions. These people are still in denial of what is really happening.

I'm still holding onto all my gold. In fact, when the IMF sells off gold, if the price drops I will be buying more.

Reference: Marketwatch.com

Wednesday, April 1, 2009

Washington Mint 4 Oz Golden Eagle

In some recent entries I've written about some silver rounds that are replicas of officially-minted classic coins. Today I'll show you an example of a replica coin, or silver "art round" as they are sometimes called. This is a "Giant Quarter Pound Golden Eagle" produced by the Washington Mint (note that this is a private mint, not the US Mint). The quarter pound Golden Eagle is a replica of the American eagle gold bullion coin, approximately copying its design of St. Gaudens' Lady Liberty and the American Eagle. However, it is not a gold coin, it is a silver round containing one quarter pound of .999 fine silver, and 24 karat gold plated.

Washington Mint $100 4oz silver coin

A quarter pound is equivalent to 4 oz. troy, and this silver art round's price is based on the spot price of silver. The gold plating is pretty thin (in the certificate of authenticity it says "layered with" gold), so the gold layering doesn't really affect the price, it seems, since it's such a small amount.

Washington Mint 4oz gold layered silver art roundThe thing that immediately distinguishes this item from an original American eagle is its size. Its diameter is 3.5 inches (89.8 mm), while a 1 oz American gold eagle's diameter is 32.7 mm and a silver eagle's diameter is 40.6 mm. Its name also does not include the words "American Eagle" but rather "Golden Eagle". But you will see people selling these under the name "American Eagle" to give the impression that they are officially minted. I bought this one on Ebay, and it was referred to as a giant American Eagle. I knew what it was, so I wasn't fooled, but other less-informed buyers might be misled by such mislabelling.

The Washington Mint also produced giant 1/2 pound golden eagles and 1 pound golden eagles, as well as silver eagle replicas and platinum eagle replicas of the same giant sizes. The silver and platinum versions are also silver rounds containing .999 fine silver, with the platinum eagle replica being layered in platinum.

Even though these rounds are replicas of official bullion coins and may not be as liquid as officially minted eagle coins, they are indeed fine silver bullion and I expect to have no problems selling mine for at least the spot price of silver. I'll have it melted down if necessary. I wouldn't pay too much of a premium above spot price for this kind of replica though.